In many ways Angel Investors are looking for the same things as Venture Capitalists, but there are some big differences that companies should be aware of that will play a part in shaping their financing strategy.

Here are a few obvious contrasts that you should be aware of.

Let’s start with Definitions: An angel investor is a high net worth individual with a net worth excluding their home of $1 million or more, or who has an income of $200,000 per year (or $300,000 for a married couple) with the expectation that this income will continue into the future. Angels differ from Friends and Family who will typically invest very early on when all you’ve got is an idea and who will invest in YOU rather than in your company. Venture Capitalists are typically formed as Limited Partnerships in which the Limited Partners invest in the Venture Capital fund. The fund manager is sometimes called the General Partner and the job of the General Partner is to source good deals and to invest in the ones that they think will return the most money to the Limited Partners.

Size of Investment: Angels investing as individuals typically invest between $25,000 and $100,000 of their own money. While there are deals that are more than $100K and less than $25K, this is the area most angels fall into. Angel Groups work to syndicate many angels together into a single investment that may average $750,000 or more. Angel groups are becoming more prevalent and are a great way to get investment more quickly and all at the same terms. Venture capitalists invest an average of $7 million in a company.

Stage of Investment: Angel investors are typically investing in deals earlier than Venture Capitalists. They don’t like to invest in anything that’s just an idea, so the entrepreneur starts with Friends and Family to finance the early stage of the company up to where there is perhaps a prototype or Beta versions of the product. Angel investors most commonly fund the last stage of technical development and early market entry. Venture Capitalists will then come in with a “Series A” investment to take the company through rapid growth and rapidly develop market share. VCs will help a company to grow until they are ready to go public or be acquired, so the dollars they invest will be increasingly larger and larger as the rounds progress.

Due Diligence: Angels range from due diligence that might include having coffee or lunch with an entrepreneur to doing more thorough background checks and research with experts. When angels invest in groups they tend to do more due diligence than they do as individuals. Venture Capitalists have to do a lot more due diligence because they have a fiduciary duty to their Limited Partners. Venture Capitalists may spend as much as $50,000 or even more to conduct thorough research on their investment prospects.

Decision Making: Angels make decisions typically on their own and are not beholden to anyone except perhaps their spouses. VCs will have an investment committee who will work together to make decisions so that they are as objective as possible and won’t be swayed by just one member’s excitement over a deal.

Returns: Angels are investing earlier than VCs and so they have a higher risk to take into account. Despite this, they tend to look for about the same kind of returns that VCs look for – something like 10X the investment over five years. The reason they look for such a high return is that half of their investments are likely to go belly up and not return anything to the investor. VCs and Angels want to see a return across their entire portfolio of investments that is 20-30% per year.

Time Frame: Most Angels and VCs look for an Exit, or Liquidity Event in which they get their money back, within three to five years. Some investments take longer, of course, but Angels need to get their money back and VCs are even more under the gun since a typical Venture Capital Fund has a lifespan of ten years, after which the fund must return all capital and profits to the Limited Partners.

Board Involvement: When angels invest as a group, there will typically be an angel from the group who will sit on the board and represent the investors’ interests. If the angel is a significant contributor, then they may stay on the board even after venture capitalists invest. In other cases, the VC will take the seat representing the investors and the angel may stay on as a non-voting observer, or may retire from the board entirely.

Angel vs. Venture Capital Strategy: Raising capital from Angels is hard work. The capital raise always distracts entrepreneurs from doing the actual work of building product and getting in contact with customers. Entrepreneurs should try to put off their capital raise as long as possible, so that they can build value and get a higher valuation for their company before raising capital and diluting their equity. Sometimes angel investment is a great way to get enough traction to capture the eye of a good Venture capitalist. Other times angels will continue investing and you might never need to go to a VC. Your strategy for angels vs. VC investment will include factors such as 1) your ability to work for extended periods with little or no income, 2) the availability of Angel Investing Groups in your area, 3) the number and types of VCs in your area. (e.g. do they invest in early stage companies, etc.) and finally, because money is an accelerator for business, you will need to determine the need for rapid development of product and market. If your project is highly capital intensive and there are others who are nipping at your heels, then you probably have no choice but to raise capital as early as possible. If your strategy involves starting with Angels and then going to VCs for Series A investment, keep in mind the following: 1) angels will usually want 20-30% of your equity for their investment so be sure to keep enough equity available for follow-on investments, 2) make sure your documentation is VC Friendly. Use standard term sheets (check out nvca.org for a good template). Your deal should look as much like other deals in terms of incorporation, term sheets, board structure, etc. in order to be attractive. 3) Try to eliminate or minimize participation of non-accredited investors in your deal. Even though you can legally have a certain amount of non-accredited investors in certain types of deals, it’s best to leave them out if you’re going the VC route.

Good Luck!

For more information on Angel Investing (either as an Angel or an Entrepreneur) consider attending the Colorado Capital ConferenceTuesday and Wednesday November 15th-16th. We will have an audience of experienced Angel Investors examining 8 companies that are currently raising early stage capital in addition to two panels and two keynote speakers.

Angel Investors or those who want to learn about Angel Investing in Denver, may consider our Angel Investing Accelerator on Thursday, November 10th

It seems that either Angel Investor or Venture Capitalists both have the same DNA which makes them a part of the same coin rather than being different. The angel funding too comes on the second step only once you have taken first step or in other words have executed your plans well on initial stage (regardless of Industry). This is exactly the acute situation being faced by every individual like us who have a good idea but doesn’t have family and friends capable to invest in the idea. The ideas should also be given priority not just a set trend where every Angel investor or Venture capitalist runs behind just one model which is increasing. I am from India and in my country every second funding is taking place just in tech startups taking inspiration from the rising success of some of the players and other ideas are being ignored. No one is paying heed to the fact that what has been the new innovation in the idea? Be it Snapdeal or Flipkart (poster companies of Indian startups) or Paytm, they are merely the imitation of Amazon and Paypal so where’s the innovation. Hope a new breed of investors come soon to invest in innovation, ideas and people.

Thanks for the insightful comment Ramit. I do agree that Angels are a part of the same coin and as such they are looking for similar returns. Some of the only companies that can grow at the rate necessary t0 return 10x over 5 years are tech companies. This is one of the reasons that we see a large amount of capital going towards these types of companies. That doesn’t mean that other types of companies can’t be successful in the VC model as well. I have seen investors get interested in companies that are in the natural food industry and have almost zero funding outside of what the founder has put in. The reason that these companies get interest is because the entrepreneurs have gone a long way to validate their product and de-risk some of the biggest things that angels stay up at night thinking about. The two biggest risks are: product risk, will this do what it is supposed to do, and market risk, will people actually buy it. If you can show investors that you are on the way to mitigating each of these problems then it doesn’t matter what industry you are in.

From the little that I know about funding for films it is harder to return venture capital like returns. That does not mean that investors wouldn’t be interested you just have to have an extremely clear path towards a liquidity event, what returns you can give and when.

Hi,
I came here for expert advice.
I am a full time employee that had a good idea, and went out and built it for around 55K.
I know the idea will sell, because I have done the market research necessary, but I need some money to be able to :
1-Get the licensing to use this product in target countries.
2-Be able to Pay myself for sustenance and PR , travel, and expenses, I need in order to get traction and introduce in a market.
3-Patent the product.I already have a registered trademark.
4-Customize per market needs and scale up.

I am not residing in the states neither europe.
What are my option of VC vs angels.
What are the possibilities of finding angels online.
Do you have any other advice?

It sounds like you are in a similar place that we see a lot of the companies that come through Rockies Venture Club. Meaning that you have raised a family/founder round to build out a product and now you need a larger seed round to go out and validate that the market wants to buy your product. I will try and answer your questions as best I can:

I don’t know too much about the angel and VC markets outside of the US. The best advice that I can give you is to start with some of the larger organizations that have an international presence. Some of the ones that immediately come to mind are the unreasonable institute (impact investing), and y-contaminator.\

It is often hard to find angel investors online without first having other angels that lead your deal on platforms like Angel list.

Sorry that I don’t have too much other advice. Rockies Venture Club is relatively sheltered in the western U.S and therefore we don’t see very much international deal flow.

Angel investing is a contact sport best played in teams. Angels can invest in a much broader type of companies than a VC. They can have impact, a slower growth profile, an earlier exit. VC have to pattern match for jackrabbits that can grow explosively and might “make it big”. Working with angels can be fun.

Good morning ,
If I can get advise regarding Angels or any sponsor for website, are they even interesting in it or not.
My website is already working but looks like i hit the wall thinking it will be so easy to grow.
I guess there is too many different ideas online that people don’t want to even go FAQ page to find out how genius this is.
Looks like more important in people lives are xxx sites or social media and they are completely drawn there and they forgot about real life.
If they are interested in investing online what is fair share to even get their attention.
Thanks a lot for any answers! Matt

It is hard to get funding when you are developing your website. The people that we generally see coming through Rockies Venture Club have mitigated much of their technology risk and are now looking for funding to grow and validate their market. This is where the friends family and fools round comes in. A round that is around $50-200k and allows you to build our your product.

I don’t know if you have read the book Lean Startup but it has some great tips to bootstrap your company and marketing strategy on a very small budget.

If you do want to raise an angel round the typical round is around 20-30% and provides you with enough capital to get you to your next big milestone, whether that is being cash flow positive or ready for a series A investment.

What would you advise a start up like my own who are domiciled in Malawi (Africa) and have designed and developed an SMS based price information system designed to be user friendly to rural masses and have already secured a contract with a mobile network provider but lack finances for marketing materials and office materials to fully capture this volume bassed business?

I don’t have too much, if any experience with companies in Africa. One place that I would suggest looking is the Unreasonable Institute. They are an international company that helps companies across the world get accelerated, and secure the funding they need to move forward.

I have a company I am purchasing in Denver that has a Net Operating Income of $ 1,500,000. Revenue has increased by 25 % the past year. Looking to potentially doubling the value of the company in the next three to five years. I am looking for investors looking for a large interest rate and possible equity in the Company. Great cash flow and upside.

Hi Greg, If you are interested in pursuing angel capital I would encourage you to apply: hhttps://gust.com/organizations/rockies-venture-club/apply

I would however caution against angel capital if you can avoid it. Angels are looking to make 60% IRR on their investments, making it the most expensive type of capital out there. Additionally when an angel invests they will want a liquidity event at some point, enabling them to get their investment back. This might not be the future that you see for your company. Let me know if you have any other questions.

I am seeking early phase investors for a social media/viral video aggregator that has already gotten extensive and positive media and industry reviews within just the past few months. The site is live, gaining members, and is poised to take a sizeable portion of the $2.2 billion dollar industry. Any interested parties or referrals would be greatly welcomed and appreciated!

It is not usually a requirement for people to have local developers. In fact two of the companies that we funded this year had remote dev teams. However it is important that a local person know what is going on with development and be able to communicate that with investors.

hmmm makes me curious… where and or how did you find the remote teams? It’s usually not tooo easy to find reliable developers.

I came here because I have a huge app project which I was going to tackle alone, however now i’m considering looking for Angels or VC’s to get the money in and startup my idea much quicker. First time i’m thinking of going this route, so I’m not sure where to start.

We don’t have any connections to remote dev teams, however, we have worked closely with some dev shops that are well regarded and have produced some great work. That being said they do require more capital than many startups have the resources for. If you would like an introduction please feel free to reach out ian@rockiesventureclub.org.

I have ready to move on production a new snack that does not exist anywhere on any shelves in America. I have a comapny waiting for my word to start producing it and moving forward with it. I am looking for investment to help me start producing. get the first bags done, and move forward.

I have a question,
I have an idea and is patent pending. I am looking for an investor. I don’t know which one will be better. My idea is more about a service and it’s developing an app for this kind of service. I have talked to different companies that develop apps and they can do it. My question is, can I request from the investor the money for the app and also a salary for me?. Also, there is 2 stages; one will be making the app and the other one is the operation. Can they fund one first and then keep funding for the operations with the same equity?

Thanks for reaching out Natalie. One of the biggest risks that investors face when funding early-stage companies is the company running out of money before they can either: 1) raise follow-on funding or 2) Reach cash flow positive. It would be a large risk for an investor to only fund the build out of your app and none of the operations and growth after it has launched. At Rockies Venture Club we generally see companies that have a fully formed product (or nearly so) and expect our capital to go to validating product-market fit and growth.

You might be asking how founders get to that point of having a product before investors would be interested. Often times these entrepreneurs have raised an FFF round (Friends, Family, Founders) to get them over that first hump.

Hello. Thank you for the great article. We just launched a startup and its progressing well. However, we have need to also raise some funding. The product is already up and functional but we need funding to scale. Already in a process of raising some funding from friends and families as we personally financed the product development. I wanted to know whether they also receive shares in the company? If yes, how would you advise we allocate the shares as we may deal with a number of possible funders who are neither Angels nor VCs.

Thanks for the questions Fred and congrats on the early traction. As in most things in this world the initial answer is: it depends. If it is in your plan to raise future funding we often advise using a simple convertible note (8% interest and a 20% discount) for an early friend and family round. This way they convert to equity at the valuation of the future round. If the current plan is that this is going to be the first and last round of capital injection then a simple equity round would make sense. That way everyone is aligned and is incentivized to help your company grow.

Thanks for the elaborate article. As a startup, it is sometimes difficult to ascertain which route to take- Angel Investor or VC.
While there is no hard and fast rule, I have seen investments in different stages from both.
A quick question though: In recent times (206 onwards), have you seen any significant changes in the Angel/VC investment model?

Rockies Venture Club is based in Colorado so a lot of the trends that we see are often different on the national stage. While we haven’t seen huge changes in the investment model, the amounts and the rounds that Angels and VCs are participating continue to rise. In the past, as angels a general goal was to get companies to a $1M revenue run rate so that the company could then go on and raise a series A from an institutional investor. Recently, that goal has increased significantly and we often see revenue in the 2-2.5M needed to raise follow-on funding. A good reference is the Halo Report, which is an industry report for the Angel Investing landscape here in the US.